FRAND injunction bites even if a rate is yet to be set

Factual background

Back in February 2019, Optis brought proceedings before the UK High Court against Apple, alleging infringement of a total of eight patents claimed to be essential to certain 3GPP cellular standards and which had been declared under ETSI’s Intellectual Property Rights (‘IPR’) Policy.  There were a number of ‘technical’ trials considering patent infringement and validity (Trials A – D) and a FRAND trial (Trial E). 

The appeal relates to a sixth trial, Trial F, where the key issue was whether Optis was entitled to an injunction following a finding of patent infringement.  By the date of Trial F, two of Optis’ patents had been held to be valid, essential to the relevant standard and infringed by Apple, but Trial E, the FRAND trial, was yet to take place.

The decision at first instance

Apple argued that a patentee is not entitled to an injunction until after the Court has determined what terms are FRAND and the implementer has decided not to take a licence on those terms.

Optis submitted that the implementer is an ‘unwilling licensee’ if it refuses to give an undertaking to take a licence on terms to be determined by the Court to be FRAND.  In such a case, a patentee should be entitled to an immediate and unqualified injunction, as opposed to a FRAND injunction.  In other words, the implementer loses the benefit of the FRAND undertaking the patentee has given to ETSI.

In his judgment, Meade J held that Optis was entitled to a so-called ‘FRAND injunction’ unless and until Apple gave an appropriate undertaking to take a licence on terms determined to be FRAND by the Court (see here for more details).  Apple gave the required undertaking, but both it and Optis appealed. 

The Court of Appeal decision

The Court of Appeal handed down its decision on 27 October 2022, dismissing both appeals.  Arnold LJ (an IP specialist) gave the leading judgment with Lady Justice Asplin and Lady Justice Elisabeth Laing agreeing. 

Arnold LJ has become renowned for being quick at drafting highly detailed judgments and this judgment was no different.  He was very positive of Meade J’s first instance decision, considering it methodically and identifying no errors of judgment and praising it as “very through”.

Arnold LJ upheld Meade J’s finding that Clause 6.1 requires a beneficiary of the obligation (the implementer) to commit to taking a licence as soon as it is established that a valid standard essential patent (‘SEP’) is infringed, irrespective of whether the FRAND terms of that licence are yet to be determined.  If this were not the case, the implementer would have the benefit of Clause 6.1 without the burden.  Further, the SEP owner would suffer a substantive loss of rights in respect of an ageing and time-limited property right.

Clause 6.1 of the ETSI IPR policy

The interpretation of Clause 6.1 of the ETSI IPR Policy is central to this case.  It provides that when a patent is declared to ETSI as being, or likely to be, standard essential, the patent owner is required to give an irrevocable undertaking that it is prepared to grant licences on FRAND terms (the ‘ETSI Undertaking’). 

Clause 6.1 was considered extensively by the Supreme Court in Unwired Planet (see here for more details).  The Supreme Court held that it had to be interpreted in a manner which avoided the twin evils of ‘hold up’ by the SEP owner and ‘hold out’ by the implementer.  In simple terms, ‘hold up’ occurs if a patentee is able to ensure that a SEP is incorporated into a standard which then enables it to use the threat of an injunction to restrain infringement and extract a royalty rate higher than a FRAND rate.  ‘Hold out’ occurs if an implementer is able to implement a technical solution covered by a SEP without paying the reasonable market value for a licence (or perhaps anything at all).  The Supreme Court held that hold up is avoided by ensuring that that the SEP owner is held to its ETSI Undertaking under Clause 6.1.  Hold out is avoided by allowing the SEP owner to enforce its right to an injunction save to the extent that it would be inconsistent with the SEP owner’s ETSI Undertaking.

Apple’s grounds of appeal

Apple argued that Meade J’s interpretation of Clause 6.1 was inconsistent with the policy objectives of the ESTI IPR policy.  These envisage that the SEP owner and implementer will negotiate a licence.  Arnold LJ rejected this argument on the basis that national courts will only step in where the parties cannot agree FRAND terms.  National courts will only enforce their determination against a SEP owner by withholding an injunction if the SEP owner is unwilling to abide by its ETSI Undertaking and grant a FRAND licence.  Against an implementer, a national court will only enforce its determination by granting an injunction if the implementer is unwilling to take a FRAND licence. 

Apple also argued that the judge’s interpretation of Clause 6.1 deprived an implementer who has been found to infringe a SEP of the choice between taking the Court determined licence, once its terms were known, and submitting to an injunction.  Arnold LJ dismissed this argument.  The implementer was not entitled to the luxury of being able to wait until all appeals were exhausted before making a decision as to whether to accept the Court determined FRAND rate or not.  Allowing the implementer to do so, would promote hold out. 

For similar reasons, Arnold LJ also considered and rejected the argument that Meade J’s interpretation of Clause 6.1 upset the delicate jurisdictional balance established in the Supreme Court’s decision in Unwired Planet, nor did it not involve an exorbitant exercise of jurisdiction by the UK Court.  At the time of determining the FRAND terms of a global licence, the Court would be seized of that issue as part of a dispute as to the validity, essentiality and infringement of a UK SEP.  A subsequent decision by the implementer to cease practising the invention in the UK in order to avoid paying royalties in the UK pursuant to the Court determined licence would not retrospectively call into question the Court’s exercise of its jurisdiction to determine the terms of a global FRAND licence at the time of decision.

Optis’ grounds of appeal

Arnold LJ did not accept Optis’ contention that an implementer who fails to commit to take a Court determined licence having been found to infringe a SEP (i.e. an unwilling licensee) becomes permanently disentitled to rely upon the SEP owner’s ETSI Undertaking.  The judge’s interpretation achieved the required balance between access to SEPs with a fair reward to SEP owners.  If Optis were right, which they were not, it would open the door to hold up.

Competition law

Apple argued that Optis had abused its dominant position contrary to Article 102 of the Treaty on the Functioning of the European Union.  In particular, Apple argued that Optis should not be rewarded with an injunction for allegedly failing to negotiate in good faith with Apple.  Meade J had held that, even assuming that Optis had abused a dominant position, that did not justify withholding an injunction. 

Arnold LJ agreed.  Withholding an injunction where a SEP had been found to be valid, essential and infringed would leave the SEP owner without an adequate remedy and promote hold out.  Further, the timing did not support Apple’s submissions.  The decision to grant or withhold an injunction looks to the future, whereas Apple’s complaint about failure to negotiate in good faith before proceedings were launched was in the past.  Therefore, the assumed abuse had no continuing effect because Optis had accepted that they must grant a licence on terms that would be determined to be FRAND by a neutral party (the UK Court). As Arnold LJ noted, the only obstacle Apple face is their own unwillingness to commit to taking a Court determined licence before the terms have been finally determined.

Postscript

Arnold LJ added a postscript to his judgment in which he highlighted what he considered to be the “dysfunctional state” of the current system for determining SEP/FRAND disputes.  The only way to put a stop to the attempts to game the system was for ETSI and other standard setting organisations to make arbitration of such disputes legally enforceable through their IPR policies.

Comments

This judgment is full of interest, but there are two issues of particular note.

Firstly, Arnold LJ’s specific finding that Optis, as the SEP owner, has the choice in taking the higher of (1) Apple’s offered FRAND rate (assuming it was FRAND); and (2) the rate which would be determined by the judge in the FRAND trial (Trial E).  As noted in the judgment, the fact that Apple were unwilling to commit to taking the as yet to be determined FRAND licence was precisely because they were concerned by this possibility.

In making this finding, Arnold LJ referred to the Court of Appeal’s decision in Unwired Planet, in which the Court held that more one set of terms may be FRAND and that where a SEP owner had fulfilled its obligations under Clause 6.1 and offered a FRAND licence to an implementer, it would be for the SEP owner to choose which of the set of FRAND terms it preferred.  The Supreme Court had noted this comment without criticism.    

Given that there are several ongoing cases before the UK Court where a party is also seeking a global FRAND determination in another jurisdiction, this finding may have a significant impact. The Court of Appeal’s judgment suggests that there is room for more than one FRAND determination with the SEP owner being able to choose the highest of the awarded FRAND rates.  This is not a suggestion that there should be forum shopping for FRAND terms.  But what it does mean is that, if an implementer does not agree to pay the FRAND rate being offered by a patentee, then in the UK they risk a FRAND injunction being granted once a UK SEP is found valid, essential and infringed.  Whether courts in other jurisdictions would take the same view remains to be seen. 

The above does not resolve the problem of the world-wide battles which can break out between SEP owners and implementers, which leads directly to the second point of note from Arnold LJ’s judgment.  Arnold LJ has made no secret of being a long-time advocate of arbitration for resolving FRAND disputes.  Although many SEP owners have publicly expressed their willingness to arbitrate disputes, there are significant challenges to implementing a system that compels parties to arbitrate FRAND disputes.  As a result, it seems likely that litigation will remain a mechanism for resolving FRAND disputes for the foreseeable future.