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29 September 2016PatentsDaniel Hoppe

Huawei v ZTE and the many-headed Hydra

The Court of Justice of the European Union (CJEU) established important criteria for licensing of standard-essential patents (SEPs) in last year’s Huawei v ZTE judgment. The court provided a framework of rights and obligations for SEP owners and users. On the day of the CJEU’s decision, commentators had already identified a huge number of follow-up questions. As the Lernaean Hydra in Greek and Roman mythology grew at least one new head with every one chopped off, the field of SEPs brings about at least one new question with every one answered.

The case law of the German courts of instance in the last 12 months is testament to this phenomenon. In Germany, more than in other jurisdictions, defendants need to rely on a compulsory licence defence. Four German courts—the Regional Courts of Düsseldorf and Mannheim,and the Higher Regional Courts of Düsseldorf and Karlsruhe—have applied the CJEU’s criteria.

The regional courts generally imposed stricter obligations on the alleged infringer and showed a certain reluctance to stick strictly to the CJEU’s decision. The higher regional courts disagr eed on some important points. Overall, the application of the CJEU’s criteria is not consistent.

SEP owner’s obligation to notify

The CJEU ruled that SEP owners must alert an infringer of the infringement before bringing an action. The principle appears very clear but the courts have proved that it is not.

‘Transitional’ cases

The courts had to deal with cases where the SEP owner had brought the action before the CJEU’s decision and the advocate-general’s opinion. Could one claim that the SEP owner had not complied with the CJEU’s criteria that were later pronounced?

The Düsseldorf Regional Court took a very simplistic approach and did not require the claimant to notify the infringer in such cases at all. The court stated that in those “transitional” cases, the claimant did nothing wrong in following the previous case law of the German Federal Court of Justice (judgment dated May 6, 2009, case KZR 39/06—Orange-Book-Standard), which did not oblige it to notify the infringer.

This decision completely exempted the claimant from the obligations set out in the CJEU’s decision. This approach was not easy to understand, as exactly the same situation had given rise to the Huawei referral and the CJEU’s decision in the first place. In Huawei, the patent owner was also compliant with the Orange-Book-Standard approach. The CJEU determined an abuse of a dominant market position anyway. On appeal, the Düsseldorf Higher Regional Court harshly criticised the regional court’s decision and vacated it.

The Mannheim Regional Court and the Karlsruhe Higher Regional Court took a slightly different approach. They decided that in those “transitional” cases the SEP owner could still fulfil the obligations after the action was brought. Therefore, the SEP owner could notify the infringer by filing the complaint itself or in the course of the court proceedings.

Moreover, the SEP owner could make a fair, reasonable and non-discriminatory (FRAND) offer during the proceedings, too. The court considered such an offer fair despite the pressure the lawsuit put on the infringer. The Düsseldorf Higher Regional Court noted that a distinction between transitional cases and new cases was inadmissible in principle.

However, the court did not rule out that the SEP owner could still take the necessary measures in the course of the proceedings. In essence, the courts accepted that the SEP owner did not comply with its obligation to notify the infringer as long as the SEP owner remedied this in the course of the court proceedings.

Which brings about the question: if the SEP owner is able to remedy its omission in “transitional” cases, could it also be allowed to remedy it in a “normal” case? The courts have not had to answer this question so far. They will have to one day.

Can a lack of notification be remedied?

Assuming that the patent owner does not meet the notification obligation, what if the infringer shows unwillingness to take a licence? According to the CJEU’s judgment, the infringer must communicate the intention to take a FRAND licence only when the patent owner has given a proper notification. The lack of notification renders the seeking of injunctive relief an abuse under article 102 of the Treaty on the Functioning of the European Union.

“The defendant must show its willingness to take a licence within a short period of time after the infringement action has been filed.”

Still, according to the Mannheim Regional Court, the infringer’s behaviour can remedy the SEP owner’s omission. According to the Mannheim court, suing without prior notice is not abusive when the defendant does not show its willingness to take a licence after the proceedings begin. The defendant must show its willingness to take a licence within a short period of time after the infringement action has been filed. The court considered a response time of five months as clearly too long.

Content and addressee of the notification

The necessary content of the SEP owner’s notification is unclear, too. According to the Mannheim Regional Court, the SEP owner meets the obligation to notify if it identifies the relevant patent, points out that the patent is essential to the standard and explains the infringement allegation. To this end, the SEP owner may provide claim charts of the relevant claims. In the recent decisions, the courts have not put much weight on the question of what exactly the requirements of the notification are.

There is uncertainty over whom the SEP owner must address with the notification in a case with a multinational enterprise. Consistent with its generally patentee-friendly position, the Düsseldorf Regional Court has held that the patent owner meets the obligation to notify by notifying the parent company of the infringer. However, there is not much logic in this approach. If the patent owner is able to sue the subsidiary, why should it not be able to notify the subsidiary itself first?

Additionally, the question of supply chains came up. It is common practice in German patent litigation to sue downstream companies to leverage the pressure those companies create on their suppliers. The Karlsruhe Higher Regional Court, in a decision pronounced before the CJEU’s Huawei judgment, had held that in certain circumstances an obligation may exist on the part of the patent owner to negotiate a licence with the patent-infringing supplier before seeking injunctive relief against the supplier’s customer.

However, there does not seem to be a consensus on when the SEP owner must notify the supplier of the alleged infringement, and in which form it must do so. There seems to be some more legal certainty in cases where the supplier actually declared a willingness to license the patent on FRAND terms. The Düsseldorf Regional Court decided that the downstream customers may refer to this declaration of their suppliers/manufacturers.

SEP owner’s FRAND offer

Similar questions arise regarding the SEP owner’s FRAND offer.

Addressee of the FRAND offer

If the infringer expresses an interest to take a licence, the SEP owner must make a FRAND offer. The Düsseldorf Regional Court stated that the SEP owner may address this offer to the defendant’s parent company provided that this offer covers the defendant too. Again, this is hard to understand. In Germany, the concept of corporate separateness exists. Thus, there is hardly a justification not to direct the offer to the entity concerned.

FRAND quality of the offer

Moreover, the Düsseldorf and Mannheim Regional Courts assumed that the defendant’s offer does not actually need to be FRAND. As long as the alleged infringer has not made a specific counter-offer, the court was not obliged to assess whether the SEP owner’s offer complies with FRAND terms, unless it was not evidently a non-FRAND offer. The Düsseldorf and Karlsruhe Higher Regional Courts rightly opposed these decisions—but left open how the courts were supposed to determine whether an offer is FRAND.

The Karlsruhe Higher Regional Court did at least consider the possibility of giving the SEP owner leeway in determining the licensing terms within the limits of FRAND, and the Düsseldorf Regional Court decided that the SEP owner’s previous licensing practice may be relevant for the determination of FRAND terms. If a number of licensing agreements are in place with similar terms, there is an assumption that licensing terms consistent with this practice are FRAND. The court also stated that licensing a portfolio was FRAND if portfolio licences are customary in the relevant business sector.

Contents of the FRAND offer

The FRAND offer must be formally acceptable and contain information on the amount and calculation method of the licensing fees. According to the Düsseldorf Regional Court, it is sufficient when the SEP owner shares the essential considerations that lead to the FRAND-conformity of the licensing fees it asks for. The SEP owner does not need to present a mathematical method that leads to its licensing fees.

Infringer’s counter-offer

There seems to be some more certainty around the infringer’s counter-offer, even though the FRAND-related questions apply here too.

Third-party determination

The Mannheim Regional Court held that a specific counter-offer must not be based on the determination of the licensing fees by a third party.

Accounting for acts of use

When the SEP owner rejects a counter-offer, the infringer must account for acts of use and provide security for the licensing fees due. To this end, the court noted that the infringer was obliged to prepare the account and security when it draws up its counter-offer.

Reservations in the counter-offer

According to the Dusseldorf Regional Court, the alleged infringer may reserve the right to examine the validity of the patent and its standard essentiality in its counter-offer. However, it must not prolong the conclusion of a contract until these questions are clarified. The alleged infringer also has no right to reserve a claim for repayment, which is highly questionable.

Summary

German courts have decided a number of cases in the 12 months after the CJEU’s judgment in Huawei, and they continue to struggle with the details of its implementation. Hydra lost some of her heads, but more grew. In the interest of legal certainty, we hope the courts will take on the fight.

Daniel Hoppe is a partner at  Harte-Bavendamm. He can be contacted at: d.hoppe@harte-bavendamm.de

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