Unwired Planet v Huawei: non-discrimination

From the German perspective one of the most striking aspects of the Unwired Planet v Huawei decision of the UK Court of Appeal (as well as the underlying decision of the High Court) is the different approach to the issue of non-discrimination. In two apparently very similar cases the UK Court of Appeal and the Düsseldorf Court of Appeal applied different standards, which may have resulted in different overall conclusions.

In Sisvel v Haier (judgment I-15 U 66/15 of 30 March 2017) Sisvel had argued that the royalty rate it had offered to Haier was its standard rate, which had been offered to other competitors before and that this rate was in accordance with accepted market standards and reflected the fair value of the licensed patents. The Düsseldorf Court of Appeal dismissed these arguments and held that Sisvel's offer was not FRAND for the sole reason that it constituted substantial discrimination in relation to a comparable competitor, who had previously been offered significantly lower rates. Because of the established discrimination the court saw no need to consider the objectively fair value of the licensed patents or market prices applied by other licensors. Sisvel's argument that the significantly lower royalty rate was given to a reference customer to break into a particularly difficult licensing market and due to other difficulties Sisvel was facing in negotiations with this reference customer did not convince the court either. In the court's view substantially different royalty rates require an objective justification because they remain applicable for a longer time after the conclusion of the license agreements and thus have a lasting impact on the licensing costs of the licensors competing in the same product market. The Düsseldorf Court of Appeal therefore expected the owners of standard essential patents to resist requests for discounts by licensees in specific situations to avoid the distortion of competition between comparable licensees.

The UK Court of Appeal was faced with a similar case, but applied a different approach to discrimination, which may have resulted in the opposite conclusion in the case at hand: Prior to the non-technical trial against Huawei, Unwired Planet had negotiated a license with Samsung. At this time Unwired Planet was in serious financial trouble and needed fresh income. Consequently the royalty rates offered to Samsung where lower than those now offered to Huawei. Before this background Huawei argued that Unwired Planet’s offer was not FRAND, because Huawei was being discriminated against compared to Samsung.

The UK High Court dismissed Huawei’s argument on the basis of a specific construction of "non-discriminatory". According to the High Court the "ND" in FRAND refers to a "general" concept of offering the objectively fair royalty rate to everyone and does not include a "hard-edged" non-discrimination requirement that comparable licensees should be entitled to substantially equal royalty rates. The fair royalty rate is all a potential licensee can ask for. There is no separate right to be treated equal compared to other licensees, if they had been offered royalty rates below the objectively fair rate. An assessment whether the lower royalty rate is justified by objective reasons - as the Düsseldorf Court of Appeal asked in Sisvel v Haier - is not required. With this "general" understanding the "ND" in FRAND does not play a crucial role once the fair and reasonable royalty rate is determined. If a particular licensee is granted a royalty rate below the rate found to be fair by the court, other potential licensees are not entitled to the same low rate as long as they are offered the fair rate.

The UK Court of Appeal approved this approach and confirmed that Huawei is not being discriminated. It was offered the royalty rate found to be fair by the High Court, which was not challenged by either party on appeal. Therefore it did not matter that Samsung had been offered a lower rate. The UK Court of Appeal agreed that FRAND does not require "hard-edged" non-discrimination.

This approach by the UK Court of Appeal, which starts with the assessment of the objectively fair royalty, is different compared to the approach taken by the Düsseldorf Court of Appeal in Sisvel v Haier, which started the evaluation from the discrimination angle: Because it was established that Sisvel demanded substantially higher royalties from Haier than from at least one comparable competitor without objective justification, Sisvel's offer was not FRAND and the objectively fair royalty rate did not matter.

The UK Court of Appeal saw this difference, but remarked that the Düsseldorf Court of Appeal had not "directly" addressed the issue whether a licensee could be entitled to a royalty rate below the objectively fair rate, if the lower rate had been offered to other comparable licensees. Here the UK Court of Appeal may have dismissed the decision from Dusseldorf too easily, because from its overall context it is clear that the Düsseldorf Court of Appeal applied a different concept for non-discrimination and did not have to address the fair value of the licensed patents.

From the perspective of patentees and of implementers of the patented technology the currently different approaches in the UK and Germany are unfortunate, especially where in both jurisdictions the FRAND license is held to be worldwide. Implementers faced with inconsistent FRAND license terms determined by different national courts in parallel cases will probably have to accept the license terms preferred by the patentee to avoid an injunction in all involved jurisdictions. Patentees initiating FRAND litigation should also keep the different approaches in mind when choosing the forum for the enforcement of their SEPs, because the different approaches applied by the courts may lead to substantially different royalty rates.

Whether these differences will be resolved in the near future remains to be seen. Since the minimum standard for the "ND" in FRAND is the mandatory non-discrimination requirement in Art 102 TFEU, which is directly applicable in all EU member states, finding a common approach at least in the EU should be possible under the guidance of the CJEU.