FRAND License Disputes: Litigation and ADR

A party to a dispute making a conscious decision whether to litigate or arbitrate does not occur as often as some might think. The decision is often made by the circumstances. If a dispute arises regarding a license or other agreement that cannot be resolved by negotiation or mediation, the agreement may obligate the parties to litigate before a particular court or to arbitrate. In the absence of a mandate, the parties will have to litigate, unless they both agree to arbitrate. This option may be used, but it is unclear how often. In the Unwired Planet cases referred to below, the English judge, Mr. Justice Birss, indicated as much: “Most cases settle or are decided in arbitrations” (Unwired Planet International Ltd. v. Huawei Technologies (U.K.) Co. Ltd., par. 31, https://www.bailii.org/ew/cases/EWHC/Patents/2016/958.html).

In the era of COVID-19, it may be even more attractive to arbitrate.

Litigation can suit the parties. However, it has at least a few drawbacks: the length of time it can take (and the associated costs) as well as the publicity it can generate. Those drawbacks are illustrated by the progress of the Unwired Planet cases, where the defendants were the mobile telephone companies Huawei and ZTE, respectively. In 2020, after nearly seven years of litigation, they were finally decided by the Supreme Court of the United Kingdom.

At the core of the disputes were the terms by which the telecom companies could take a fair, reasonable and nondiscriminatory (FRAND) license of a global patent portfolio owned by Unwired Planet. These patents had been declared by Unwired Planet to be standard essential patents (SEPs). To avoid the English court at first instance granting a permanent injunction regarding one U.K. patent in the portfolio that it had found was valid and infringed, the defendants had to submit to the terms of a FRAND license, not just in the U.K., but in 42 countries. The majority of the revenue from the sale of mobile phones came from China, with only a small portion from the U.K.

The mobile telecom industry had set up a system to resolve the competing interests of, on the one hand, a patentee trying to prevent the use of its invention without payment and, on the other hand, the practical need for mobile phone manufacturers to use technology that had to be made to an international standard at a reasonable cost. Standards developing organizations (SDOs) had been set up as well. The European Telecommunications Standards Institute (ETSI) is the SDO for European members who contribute IP to an international technical standard and who undertake to grant a permanent license to a SEP in return for a license royalty that is FRAND.

A difficulty may arise when a patentee has a huge patent portfolio allegedly covering a mobile device and many of those patents are invalid and/or not infringed—and likely untested in the courts. This is fertile ground for disputes.

The English court at first instance in the Unwired Planet cases did indeed hold that one U.K. patent in the portfolio was valid and infringed. But there were other questions before the court as well, notably the following:

• Do U.K. courts have the jurisdiction to settle the terms of global patent portfolio licenses?
• Is the U.K. the appropriate forum?
• What does the “nondiscriminatory” aspect of FRAND require?
• Did the owner of the SEP abuse a dominant position (and is it an EU issue)?
• Should there be a damages award rather than an injunction?

The first question in this list is perhaps the most important. The answer, the courts held, lay in the contractual arrangements that the parties had entered into in the ETSI intellectual property rights protocol for resolving disputes such as these. The Supreme Court decided that this allows a national court to settle the license terms worldwide, the FRAND undertaking by the SEP owner serving as a defense to the permanent injunction that would otherwise flow from an infringement finding.

Of course, other national courts may be asked to do the same thing as the U.K. courts have done. One U.S. court had already decided it did not have jurisdiction. Some courts may follow suit; others may not. The courts in China could be forgiven for deciding that, at least in the mobile phone business, they have jurisdiction and are suitable, more so than courts in countries with smaller populations and market shares.

The other questions in the list were all decided in favor of Unwired Planet, as they had been in the lower courts.

This may indicate that U.K. courts are attractive places for other FRAND disputes, especially those in the telecom industry. In the future, the FRAND system may be expanded beyond that area, with other industries developing their own technical standards and the principle of essentiality.

The objective observer may think this is all well and good, but at what cost in money and in time? In the same Unwired Planet judgment referred to earlier, Mr. Justice Birss noted, “I am told that the costs of the proceedings are likely to reach £50 million. This is a huge sum.”

In the Unwired Planet cases, it took the U.K. courts years to deliver a final judgment on FRAND royalties. That is an exceedingly long time, especially in this industry. Other litigated cases may also follow the same path—in the U.K. and elsewhere—on the same or different points of principle.

Even if the third and final level of appeal is not pursued or available, most cases involving large sums of money go to one level of appeal, but that may shave only a couple years off the total time to a final decision (which varies considerably even among sophisticated forums).

Whereas the holders of many SEP portfolios can afford that cost, with 5G and the proliferation of additional standards, there will be new parties, innovators and implementers, including small and medium-sized enterprises.

In these circumstances, parties may want to consider arbitration as a one-shot method of dispute resolution for matters in which license terms cannot be agreed upon. Indeed, it could be built in as a requirement of any SEP system. Arbitration proceedings can even be expedited, and they certainly will conclude long before seven years has elapsed. There are of course the added advantages of confidentiality and the ability of the parties to choose for themselves an international panel of arbitrators.

Finally, in terms of alternative dispute resolution, there is also the option of mediation. FRAND disputes are all about money, so they are well suited to mediators helping parties to reach a sensible compromise that is both time and cost-efficient.