Cleaning the (patent) pool: Supreme Court opens the door to judicial determination of FRAND rates for patent pool SEPs

In another example of the English courts’ willingness to accept jurisdiction to determine fair, reasonable and non-discriminatory (FRAND) rates for standard essential patents (SEPs), the Supreme Court has recently handed down its decision in the long-running case of Tesla v InterDigital, following Tesla’s appeal. In it, the court unanimously confirmed the ability of the English courts to determine whether the terms of a licence offered by patent pools and platforms (Patent Pools) that include SEPs are FRAND. This is the case even where, as here, the operator of the Patent Pool has made no FRAND commitment and is not the owner of any of those SEPs. The decision is an important one as it paves the way for judicial scrutiny of the rates being charged by operators for their Patent Pools. 

Background

The Patent Pool in question was one for various 2G-5G SEPs which Tesla needed a licence to in order to implement 5G connectivity in their vehicles. It was operated by Avanci, as agent on behalf of (at the time) approximately 65 SEP owners, who had authority to license the SEPs in a pre-determined global manner at a rate of $32 per vehicle. Avanci considered this rate to be FRAND but Tesla thought it too high. Tesla therefore sought declarations from the court against both Avanci and InterDigital (as the owner of certain key UK SEPs on the platform) that Tesla is contractually entitled to a FRAND licence to all SEPs on the platform and that the rate offered by Avanci was not FRAND and should be set at a lower rate determined by the court (the “FRAND claims”). 

The High Court initially struck out the FRAND claims on jurisdiction grounds, largely on the basis that it found that there wasn’t a serious issue to be tried. It also, obiter, agreed with the respondents that Tesla had failed to show that the English courts were clearly a more appropriate forum to hear the claim than the Delaware Court of Chancery (InterDigital and Avanci both being Delaware entities). 

The majority of the Court of Appeal dismissed Tesla’s appeal, agreeing with the High Court. However, Arnold LJ dissented stating he would have allowed the appeal both in relation to the question of whether there was a serious issue to be tried and whether the Delaware Court of Chancery was an available forum for the FRAND claims. 

Supreme Court’s decision

The Supreme Court essentially agreed with Arnold LJ. It concluded that there is a serious issue to be tried as to whether the FRAND obligation applies to an offer to license jointly through a patent pool or platform (as opposed to bilaterally). The court was clearly concerned that if the FRAND obligation fell away when SEPs were licensed through a Patent Pool, it would create an obvious loophole in the FRAND system. The court also found that there was nothing in the FRAND obligation or the broader IPR policy underpinning the ETSI standards regime that indicated that the FRAND obligation shouldn’t apply in that scenario. 

Assuming that the FRAND obligation does apply, the Supreme Court went on to find that there is also a serious issue to be tried as to whether a FRAND licence of InterDigital’s UK SEPs would have to be a global licence to the whole Avanci 5G platform at a FRAND rate. In reaching this conclusion, the court noted that if the commercial reality of licensing standards such as the 5G standard is that bilateral licensing is not practicable due to the sheer number of SEP owners involved “that is a powerful factor in support of the conclusion that only a platform licence can be FRAND”. Indeed, the practice of Patent Pools has developed to deal with this issue and the court noted that some licensors relied on the availability of the Patent Pool licence to discharge their FRAND obligation. 

Finally, the Supreme Court considered that there was a reasonable prospect of the English courts granting the declarations sought by Tesla and that there was no need to join the other SEP owners.   

As for the other jurisdictional challenges, the Supreme Court agreed with Arnold LJ that the claim should be characterised as a claim about the licensing of InterDigital’s UK SEPs on the Avanci 5G platform. On that basis, the court agreed with Arnold LJ that the Delaware Court of Chancery would likely not determine a FRAND rate based on non-US patents (such as those UK SEPs) and therefore the English courts were the more appropriate forum. 

What this means for SEP owners and implementers

Importantly, the Supreme Court’s decision does not conclusively determine the issues highlighted above in substance as they have been referred back to the High Court for full trial. However, the decision does clarify that the English courts have jurisdiction to consider Patent Pool rates involving UK SEPs and opens the door to them determining what the FRAND terms would be for collective licences. That is good news for implementers as it reflects the commercial reality of licensing standardised technology (which is becoming increasingly critical in a world of interconnected devices) without losing the right to benefit from FRAND terms. It does though raise questions for SEP owners who license their patents via a patent pool or platform, as well as for pool and platform operators, who will all need to consider whether or not the rates they are setting are truly FRAND. 

Regardless of what is ultimately decided, it seems likely that there will be an uptick in claims from implementers asking the English courts to consider whether the rates set by Patent Pools are FRAND and also that SEP owners will want greater control and involvement in the rate setting and licensing practices of their Patent Pool operators going forward. That, in turn, may well have a wider impact on the operation of Patent Pools and the broad range of businesses that rely on them to access key technology.