Standard essential patents

A standard essential patent ("SEP") is a patent which protects a technology which the patentee has declared to be essential to the implementation of one or more of the telecommunications standards, such as 2G-GSM, 3G-UMTS and 4G-LTE. Standards are set by standard setting organisations ("SSO"), one of which SSO is in this case the European Telecommunications Standards Institute ("ETSI").

The advantages of SEPs are that they can greatly increase revenue and they streamline the introduction of new technologies, whereas the disadvantage is that such standards might lessen competition by driving alternative technologies out of the market.

This risk of third parties not being permitted to access the standard has been addressed by ETSI and other SSOs requiring that the owners of SEPs give an irrevocable undertaking in writing that they are prepared to grant licences of their SEPs on fair, reasonable and non-discriminatory ("FRAND") terms. Moreover, the courts have imposed conditions upon the extent to which the owners of SEPs may, through infringement proceedings, seek restraining orders or injunctive relief from third parties who have declined to accept a proffered FRAND licence.

The dispute

On 30 January 2019, Huawei China and ZTE China, the Chinese telecommunications giants, and their subsidiaries, Huawei UK and ZTE UK respectively (collectively the "Defendants"), failed before the Court of Appeal in London in their attempt to have the English courts decline jurisdiction under the forum non conveniens rule [1] in infringement proceedings brought against them by Conversant in relation to four European patents designating the UK, that Conversant had declared to be SEPs.

The UK patents form part of a global portfolio which, according to Conversant, includes SEPs in over 40 countries. Conversant, a licensing company based in Luxembourg, purchased the portfolio in 2011 from Nokia for a sum which Huawei asserts was for as little as US $20,000.

In July 2017, Conversant commenced the infringement proceedings and, as part of its relief because of the alleged refusal by the defendants to take a licence upon FRAND terms, it sought a declaration that the patents were essential and thus SEPs, and a determination of the FRAND terms for its global portfolio, i.e. not just its European (designating the UK) patents. In response, Huawei China and ZTE China have commenced proceedings in China seeking to invalidate Conversant's Chinese patents and seek a declaration of FRAND terms for the Chinese patents only. Moreover, Huawei China has sought a declaration of non-infringement and a declaration that the relevant Chinese patents are not essential and therefore not properly declared as SEPs.

China is the largest market by far for the vast bulk of relevant global sales by both Huawei China and ZTE China, and it is also the country in which the products are manufactured. By contrast, sales in the UK represented just 1% of Huawei's turnover from mobile phones and, for ZTE China, the proportion was even less at just 0.07% of total worldwide sales.

The hearings in China for the declarations of non-infringement and determination of FRAND terms for the Chinese patents were due to heard in early 2019, whereas it is unlikely that any trial to establish a global FRAND licence under the SEPs would be heard until 2020.

Conversant has also sued Huawei China and ZTE China in Germany for infringement of its patents.

After the commencement of the proceedings in China, Huawei China and ZTE China offered to ask the Chinese courts to address the global FRAND dispute. However, it is the case that as of today no Chinese court has considered any request for a global FRAND licence.

The High Court decision

On 16 April 2018, Mr Justice Henry Carr sitting in the High Court in London had held [2] that:

  1. England is clearly and distinctly the most appropriate forum to bring the claims; thus the Defendants' application to stay the UK proceedings on the basis of forum non conveniens was rejected.
  2. Huawei China and ZTE China had not been validly served in England through the purported service of the proceedings by Conversant via their UK subsidiaries.
  3. There is a serious issue to be tried on the merits.
  4. Nevertheless, leave would be given to serve Huawei China and ZTE China outside of the jurisdiction of the UK by virtue of provisions 2 and 11 of the Practice Directive of the Civil Procedure Rules 6B PD 3.1 namely that –

(2) a claim is made for an injunction ordering the defendant to do or refrain from doing an act within the jurisdiction…

(11) the subject matter of the claim relates wholly or principally to property within the jurisdiction…

Prior to the decision, the parties had agreed a mechanism for substituted service in the event that the judge ordered service outside the jurisdiction.

In October 2018, the Court of Appeal had confirmed in Unwired Planet v. Huawei [3] that the UK courts could settle a FRAND licence on parties on a global basis.

Points of appeal

China operates a bifurcated system and, as at December 2018, the Patent Re-Examination Board of China had declared seven of Conversant's Chinese patents to be invalid, three to be valid, with one invalidity case remaining to be determined.

The Defendants did not appeal the judge's findings that (i) there was a serious issue to be tried and (ii) the claim passed through the relevant provisions regarding service. However, they did appeal the ruling that England was the natural and proper place for Conversant to bring its claim on the grounds that:

  • (i) the UK court could not scrutinise the validity of Chinese patents; and
  • (ii) it is the sales in China and royalty rates set for China which would be largely determinative of any quantum claim, be it by way of damages or payments under any FRAND licence.

They submitted that in his assessment of the forum non conveniens rule, Mr Justice Henry Carr fell into error by characterising the 'dispute' as just a local (i.e. UK) issue. As such, he went against the warning given in such previous decisions as Harrods (Bueonos Aires) Ltd No. 2 Re [1192] Ch 72 that disputes should not be narrowly defined.

UK Court of Appeal decision

The Court of Appeal rejected the Defendants' challenge attack on the manner in which the judge had characterised the dispute.

Lord Justice Floyd pointed out that there is no such property as a 'portfolio right'. Patents are national property rights and patentees can choose the strategy for where they issue infringement proceedings. The dispute – which covered validity, infringement and essentiality – concerned UK patents which are governed by English law. As such, the dispute and thus the UK proceedings concerned a matter of distinct substance – not just one of form/procedure. As such, the Harrods decision, and similar decisions on the point of appropriate forum, supported the arguments of Conversant rather than those of Huawei and ZTE.

Floyd LJ held that it would be unusual if patentees were obliged to sue for infringement in the country where defendants happen to manufacture the products and/or where they made most of their sales. In this instance, the Chinese patents are different property rights – distinct from the UK patents.

The Court of Appeal also pointed out that any ruling by the UK courts, including but not limited to the determination of a global FRAND licence by the UK courts, did not prevent the Defendants seeking in China to challenge the validity of the Chinese patents in China and/or to obtain a declaration of non-infringement and/or non-essentiality. Moreover, any global FRAND licence declared by the UK courts would no doubt provide for royalties not to be paid upon the sale of non-infringing products.

Accordingly, the Court of Appeal upheld the judge's ruling that England was the appropriate forum and it rejected the wish of the Defendants to refer the matter to the Court of Justice of the European Union.

[1] Huawei Technologies Co Limited (Huawei China); Huawei Technologies (UK) Co Ltd (Huawei UK); ZTE Corp (ZTE China) and ZTE (UK) Ltd (ZTE UK) v Conversant Wireless Licensing SARL (Conversant) [2019] EWCA Civ 38

[2] [2018] EWHC 808

[3] [2018] EWCA Civ 2344