UK court defers determination of FRAND licence issues in standards-essential patent dispute

This dispute concerns a large portfolio of standards-essential patents acquired from Nokia by Vringo, a patent licensing business. Vringo claims to have offered global FRAND licence terms (including a royalty of $2.50 per smartphone, $1.50 for other handsets, and 1.5% on infrastructure revenues), and has sued ZTE for infringement of six patents in the UK because ZTE has refused to accept the proposed terms. Vringo asked the court to order a trial of preliminary issues, and in particular requested declarations that its licence terms are FRAND, and alternatively as to what would constitute FRAND terms.

According to the judge (Mr Justice Birss), the hearing of such preliminary issues might be merited in a different category of dispute. However, the court refused to schedule a preliminary trial about FRAND licence terms in this case, and instead ordered the usual trial of validity and infringement, with FRAND issues to be considered only after that.

Vringo relied on certain previous cases, in which courts have either (a) determined FRAND issues (Microsoft –v- Motorola in the United States, April 2013), (b) scheduled the determination of FRAND questions at a preliminary trial (Philips –v- Alba, High Court, October 2008, which appears to have settled before the preliminary trial), or (c) acknowledged at least the possibility of such preliminary issues being scheduled, whilst refusing to schedule them (IPCom –v- Nokia, High Court, [2009] EWHC 1017 (Pat)). ZTE resisted the application for a preliminary trial on the grounds that it is challenging validity and denies infringement, and that a FRAND trial in respect of the global portfolio would be a massive undertaking.

The judge agreed with ZTE, whilst accepting that it is possible for the court, in appropriate cases, to resolve FRAND issues before deciding the issues of validity and infringement. In particular, where the defendant not only challenges validity and infringement, but also claims that in any event, royalties would be very low, it may assist the parties to settle if the court first decides how much may be at stake. In such cases the court determines quantum on the assumption that the patents in suit are valid and infringed. The defendant may be willing to pay that sum and take a licence, but is not compelled to do so.

The present case was different: Vringo’s proposals would require a more complex consideration of the rate and terms to be negotiated hypothetically between a willing licensor and willing licensee who are not seeking a court’s determination of validity and infringement. The outcome would be different, because the court would need to take into account the possible invalidity and non-infringement of a proportion of the portfolio. Moreover, ZTE was not prepared to be bound by any such determination, and proposed in any event to pursue the issues of invalidity and non-infringement. By contrast, had both sides been willing to pursue the course taken by the US court in Microsoft –v- Motorola, nothing would prevent the English court from proceeding to a preliminary determination of global licence terms in order to resolve the entire dispute. Although this latter course would be costly, it would be less so than multiple patent trials.

The judge noted that Vringo appeared confused as to the true nature of its rights, which were nothing more than ordinary patent rights. There was no right to compel the defendant to enter into a licence. ZTE was entitled to challenge validity, which meant that FRAND issues were simply “a major distraction”. Raising such issues also risked giving the misleading impression that the defendant owed an amount that had been determined on a willing licensee basis. In reaching this conclusion, the judge appears to have contrasted the German ‘Orange Book’ cases, in which defendants have been required to behave like licensees and make royalty payments in order to avoid the possibility of injunction. The judge noted that this practice has arisen in Germany as a result, at least in part, of the German system of bifurcation between infringement and validity proceedings. And he rejected the idea that ZTE’s challenge to the patents in the English proceedings meant that ZTE was not a
‘willing licensee’ at all. ZTE was willing to take a FRAND licence of patents found valid and infringed.

In conclusion, the judge scheduled any remedies and FRAND issues to await the outcome of the validity and infringement trial.

As a subsidiary issue, Vringo wanted a declaration that ZTE was not entitled to an individual licence under any of the six patents in suit, but only a global licence as offered by Vringo. This was a question of competition law: could Vringo lawfully refuse to negotiate individual licences?

In this context, Vringo also wanted to join into the proceedings ZTE (UK)’s Chinese parent company, ZTE Corporation, which would be the counterparty to any global licence.

The judge dealt with this point succinctly, finding that it would be impossible to say in the abstract that a global offer is or is not anti-competitive. The full licence proposal would need to be examined in detail, which was a course that the judge had already rejected. Accordingly, there was also no reason to add ZTE Corporation as a party.

A detailed analysis of European laws concerning standard-setting, competition law and FRAND patent licensing, appears in the chapter contributed by CMS to the new publication by Globe Law & Business, “Intellectual Property in Electronics & Software”, which also contains an analysis of US laws written by Fish & Richardson. Publication of the book is expected in July/August 2013. Please visit the publisher’s website for further details: http://www.globelawandbusiness.com/IPES/