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21 July 2015PatentsLorna Brazell

Huawei v ZTE: the questions that need answering

When does seeking an injunction to prevent use of a standard-essential patent (SEP) abuse a dominant position?

The patent world has been waiting with bated breath for the Court of Justice of the European Union (CJEU) to hand down its judgment on this hotly debated topic in the Huawei v ZTE case.

The waiting was finally over on July 16 when, in a remarkably succinct decision, the CJEU confirmed that bringing an action for a prohibitory injunction against an alleged infringer by a SEP owner may (but will not invariably) constitute an abuse of dominance, which would be contrary to article 102 of the Treaty on the Functioning of the European Union.

The dispute

The legal dispute arises from a European patent owned by Chinese telecoms company Huawei that is declared ‘essential’ to the LTE standard, which relates to 4G mobile communications. Anyone seeking to manufacture products complying with this standard must use Huawei’s patent.

Huawei is locked in litigation in Germany with ZTE Corp and ZTE Deutchland, who have been selling base stations in Germany that Huawei alleges incorporates its patented technology.

The Regional Court of Düsseldorf, the court hearing the dispute, referred specific questions to the CJEU to clarify in what circumstances an SEP owner would abuse its dominant position by seeking an injunction for infringement of its SEP.

CJEU’s decision

In its judgment, the CJEU ruled that a SEP owner that has given an irrevocable undertaking to the standardisation body to grant a licence on FRAND terms does not abuse its dominant position by seeking an injunction or the recall of products due to alleged infringement, as long as the SEP owner has:

a) Alerted the implementer to the alleged infringement and the way in which the SEP has been infringed; and

b) After the infringer has expressed its willingness to conclude a licensing agreement, presented a written offer for a licence on FRAND terms that specifies the royalty and how it was calculated.

Where the alleged infringer continues to use the SEP, that party has not diligently responded to the owner’s offer, in good faith and with, for example, no delaying tactics, the court said. This may require a prompt, written counter-offer and the provision of security such as a bank guarantee for the royalties due for past and continuing sales.

The CJEU confirmed the advocate-general’s opinion that a SEP owner does not abuse its dominant position by seeking the rendering of accounts or an award of damages in respect of past use of the SEP.

Where does this leave us?

The European Commission, as the enforcement agency for EU competition law, has welcomed the judgment, confirming the approach taken by the commission in previous technology cases.

Nevertheless, the judgment leaves much to be worked out.

When does a disagreement over the proposed terms of a licence cease to be good faith and become a delaying tactic? In particular, the court’s acceptance that an alleged infringer cannot be criticised for challenging the validity of the patent or indeed questioning whether it is in reality essential to the standard (and so not necessarily infringed) opens the door to lengthy disputes over the rights and wrongs of those issues before any licence can be finalised.

The provision that an alleged infringer that agrees in principle to take a licence must provide security pending final terms being agreed is meant to protect the SEP owner during this period—but the court stopped short of mandating third party adjudication of the appropriate royalty, leaving that to the parties’ equally uncertain agreement.

Lorna Brazell is a partner at law firm  Osborne Clarke. She can be contacted at: lorna.brazell@osborneclarke.com

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