LESI: The FRAND saga continues

On November 20, 2014, Advocate General (AG) Melchior Wathelet at the Court of Justice of the European Union (CJEU) gave his eagerly awaited opinion in Huawei v ZTE about the proper way to conduct fair, reasonable and non-discriminatory (FRAND) licensing negotiations.

Some industries, most notably telecoms, are heavily standardised. Since all the components of a complex technological system must work together, every manufacturer of every component must comply with the same technical requirements.

Many of the technologies that find their way into a technical standard are protected by a patent. A large number of these patents are technically essential to a standard. Put simply (although some qualifications do apply), standard-essential patents (SEPs) are those whose use cannot be avoided by a company that wishes to produce a standard-compliant product.

This gives the owner of an SEP a powerful, even dominant, position, with great potential for abuse within the meaning of article 102 of the Treaty on the Functioning of the European Union (TFEU). Left unrestricted, the SEP owner could charge excessive royalties that are not justified by the value of the patented technology, simply because its SEP is indispensable to the standard.

In order to limit the potential for abuse, companies that have declared a patent potentially essential to a technical standard are generally subject to a FRAND commitment: the SEP owner agrees to license its SEP to any standard-implementer on FRAND terms.

The FRAND requirement is largely understood to limit to some extent the SEP owner’s right to seek injunctive relief against the standard-implementer. Otherwise, the SEP owner could ‘hold up’ the standard-implementer and prevent it from commercialising standard-compliant products on the basis of one single SEP, even though each technical standard is populated by hundreds of SEPs. While the principle is largely undisputed, disagreement remains about when the quest for injunctive relief is abusive.

German Orange Book judgment

On May 6, 2009, the German Supreme Court—the Federal Court of Justice (Bundesgerichtshof)—issued a controversial judgment in the Orange Book case. The Orange Book is a de facto standard created by Philips that contains the format specifications for CD-Rs.

In this judgment, the German Supreme Court took a very pro-patentee position. The court held that the standard-implementer is required to take the initiative by sending the SEP owner an offer to take a licence—an offer that is so favourable to the SEP owner that it would be abusive on its part not to accept it. The standard-implementer’s offer should not be conditional upon the patent’s being found valid or infringed, but it doesn’t necessarily have to include a specific royalty rate. If the standard-implementer is already using the SEP, it must render an account of its use and deposit sufficient funds for the payment of the royalty in escrow. The court held that if all these conditions are fulfilled, the SEP owner might abuse its dominant position by seeking injunctive relief against the standard-implementer.

In practice, these German requirements put all the burden of the FRAND negotiation on the standard-implementer. The German approach was not shared by other courts in Europe, most notably the District Court of the Hague, which explicitly distanced itself from the German Orange Book judgment when asked to decide the same case between the same parties.

The European Commission’s decisions in Samsung and Motorola

On April 29, 2014, the European Commission issued decisions in two investigations against Samsung and Motorola for a possible abuse of dominance in a FRAND context. Samsung and Motorola had been accused by standard-implementer Apple of abusing their dominant positions by refusing to license their SEPs on FRAND terms and seeking injunctive relief, even though Apple claimed to be “willing” to take a FRAND licence.

"The commission insisted that the standard-implementer should always be at liberty to challenge the validity and infringement of the SEP, even while negotiating a FRAND licence."

The commission decided that the owner of a FRAND-encumbered SEP commits an abuse of dominance within the meaning of article 102 TFEU if it seeks injunctive relief against a standard-implementer that is “willing” to take a FRAND licence to this SEP. Contrary to the German Supreme Court, the commission insisted that the standard-implementer should always be at liberty to challenge the validity and infringement of the SEP, even while negotiating a FRAND licence.

It is in the public interest for anyone, including licensees, to challenge patent rights to make sure that no-one pays for intellectual property that should not have been granted in the first place. Further evidence of “willingness” is the agreement of the standard-implementer to submit to a third party a determination of the FRAND terms by a court or an arbitration tribunal.

Even after the commission’s decisions, the questions of under which specific conditions a standard-implementer can be considered “willing”, who should take the initiative for a FRAND negotiation, and how detailed the offer and the counter-offer should be, remain a concern.

The AG’s opinion in Huawei v ZTE

These issues came up again in the Huawei v ZTE patent litigation before the Düsseldorf Regional Court (Landgericht Düsseldorf) in Germany, which referred a number of questions to the CJEU. AG Wathelet responded to these questions in his opinion of November 20, 2014.

"The AG first remarked that the mere ownership of an SEP does not automatically create a dominant position."

In a diplomatic attempt not to offend the German Supreme Court, the AG noted that the reasoning of the German Orange Book judgment could not apply in the present case as Orange Book concerned a de facto standard rather than a formal FRAND-encumbered standard.

Regarding the commission’s position in Samsung and Motorola, the AG considered that mere willingness on the part of the standard-implementer to negotiate “in a highly vague and non-binding fashion” was not sufficient to limit the SEP owner’s right to seek injunctive relief. The AG claimed to choose a “middle path”, which in fact is largely in line with the position of the commission.

The AG first remarked that the mere ownership of an SEP does not automatically create a dominant position. Since the Düsseldorf court had not asked any questions about the existence of dominance, the AG did not elaborate on this point.

Wathelet then tried to strike the right balance between the right to IP, the right of access to the courts, and the freedom to conduct one’s business and enjoy unrestricted competition, concluding that the patentee’s right to seek injunctive relief can be restricted only in exceptional circumstances.

In light of the technological and economic dependence of standard-implementers on SEP owners, the SEP owner’s attempt to seek injunctive relief constitutes a FRAND violation and an abuse of dominance contrary to article 102 TFEU if the standard-implementer is “objectively ready, willing and able to conclude such a licensing agreement” and to pay an appropriate royalty.

In those circumstances, before bringing an action for injunctive relief, the SEP owner must alert the standard-implementer in writing to the fact that it may be infringing one or more of its SEPs—which the SEP owner must specifically identify. Also, the SEP owner must make the first FRAND offer that contains all the terms normally included in a licence in the relevant sector, including the precise amount of the royalty and the way it is calculated. In return, the standard-implementer must respond in a diligent and serious manner to the offer, and if necessary, submit to the SEP owner a reasonable counter-offer.

If the parties are unable to agree, the standard-implementer can ask for a third party determination of the FRAND terms, although in that case it may have to provide a bank guarantee or place funds in escrow to cover the past and future use of the SEP. In line with what the commission said, the standard-implementer cannot be considered “unwilling” if it reserves the right to challenge the validity or infringement of the SEP.

The AG noted that these principles apply only when an SEP owner seeks injunctive relief or recall of the products in question, since these remedies actually result in the exclusion of such products from the market (as opposed to a request for damages or a rendering of accounts).

Next steps

The AG’s opinion is not binding. The CJEU’s judgment is expected in the coming months; it is likely, although not certain, that the CJEU will follow the AG’s opinion. The Düsseldorf court will then have to apply the principles set forth by the CJEU to the facts at hand.

The AG’s opinion provides a satisfying answer to a lot of questions that had been troubling FRAND aficionados for years. As always, some questions remain unanswered, such as whether the standard-implementer is still “willing” if it insists on taking a licence only to individual SEPs in particular countries, as opposed to a worldwide portfolio licence. And so the FRAND saga continues. 

Patricia Cappuyns is a  LESI contributor and has worked as a patent litigator for 15 years, representing clients in the life sciences, mechanical engineering, biotechnology and telecoms industries. She has been involved in a number of investigations conducted by the European Commission concerning SEPs. She can be contacted at: patriciacappuyns@skynet.be