A state of flux: the Huawei v ZTE FRAND framework

In November 2017, the European Commission issued its Communication on Setting out the EU approach to Standard Essential Patents (SEPs), adding more pieces to the Huawei v ZTE (2015) application framework puzzle. The Huawei case outlined the circumstances in which seeking injunctive relief in patent disputes over SEPs would constitute an abuse of the SEP owner’s dominant position in violation of article 102 of the Treaty on the Functioning of the European Union (TFEU).

While the Commission’s report sidesteps addressing some of the most contentious issues regarding the availability of injunctive relief for holders of SEPs, it does clarify how SEP owners and standard implementers can comply with their respective duties under the Huawei framework. In its discussion of creating a predictable enforcement environment for SEPs, the Commission’s report touches on five key areas: the bilateral nature of Huawei obligations; the requisite level of detail for offers and counter-offers; the timeliness of a response to an offer; the magnitude of security and damages; and the propriety of offering portfolio licences for SEPs.

Significantly, the Commission’s report does not address the appropriate methodology for the determination of market dominance, applicability of the framework to cases pending before the Huawei decision, or any confidentiality issues which may arise out of the Huawei requirements.

Bilateral obligations

The Commission indicates that the Huawei framework imposes obligations on both parties to a licensing dispute.This statement is consistent with the interpretation of the Huawei framework by the Düsseldorf Higher Regional Court, which in 2016 indicated that the obligations of the parties under Huawei were sequential and held that regional courts must determine whether a SEP holder’s offer is on fair, reasonable, and non-discriminatory (FRAND) terms (Sisvel v Haier).

Likewise, the Commission’s statement squares with the view of the Higher Regional Court of Karlsruhe (2016) that in determining whether to grant injunctive relief under the Huawei framework, regional courts must conduct a full assessment of a SEP owner’s licensing offer prior to examining the implementor’s reaction to the offer; this is a result of the sequential nature of Huawei obligations in which the obligation of the implementer to indicate it is a willing licensee will not be triggered until the SEP holder presents a FRAND offer (Pioneer v Acer).

Thus, while the Commission and the courts both appreciate that the licensor and potential licensee have obligations under the Huawei framework, the Commission and the courts have continued to leave open both the scope of those obligations and the specific requirements that must be met to comply with the framework.

Offer and counter-offer requirements

The Commission’s report largely relies on existing case law to address the requirements for offers and counter-offers, indicating that the SEP owner must provide “sufficiently detailed and relevant information to determine the relevance of the SEP portfolio and compliance with FRAND.”

The Commission indicates that to meet these requirements, the offer should include: information regarding the essentiality of the patents to a standard; an indication the implementer’s products that allegedly infringe; the royalty calculation; and supporting materials that indicate whether the calculation is non-discriminatory.

Similarly, implementers’ counter-offers must be “concrete and specific” and must describe the use of the standard in the allegedly infringing product. Additionally, counter-offers must be made in good faith, in accordance with recognised commercial practices, and as quickly as possible after an offer by a SEP holder has been made.

In practice, compliance with the first portion of the notice requirements articulated by the Commission has been achieved by presenting the implementer of the standard with claim charts identifying the asserted claims and relevant passages of the standard for each claim.The Mannheim Regional Court has indicated the level of detail required in the claim charts may be fact-dependent, but in providing the information, the SEP holder should take into account the level of technical expertise the infringer possesses or is able to obtain.

Even though the SEP owner must identify the allegedly infringing products, most SEP owners continue to refer to the language of the standard in presenting claim charts rather than product documentation. So far, none of the courts has suggested that this practice is not appropriate.

With respect to royalty calculations, the Commission’s report defers to case law, which provides that the calculations should include something beyond multipliers to access whether the offer is FRAND. The higher Regional Court of Düsseldorf indicated that all parameters forming the basis of a licence rate calculation, which the implementer of the standard could use to determine whether the offered rate is non-discriminatory and not exploitive, should be disclosed to the implementer.

Evidence that the SEP owner has previously licensed its technologies on comparable terms supports the presumption that the offer is non-discriminatory when similar terms are presented to the implementer. However, it is important to note that the non-discrimination prong of the FRAND commitment prevents discrimination between implementers that are similarly situated. Therefore, SEP owners retain considerable discretion over their licence terms and fees. Because the Commission’s report did not indicate the specific level of detail necessary to demonstrate the above requirements in initial offers, SEP owners continue to operate in a space of uncertainty.

With regards to counter-offers, the case law has not elucidated the exact requirements to satisfy the notion of a “concrete and specific” counter-offer to guide what an implementer should provide to the SEP owner. The only guidance thus far is that proposals to have the royalty determined by an independent third party, rather than a proposal for a specific royalty, are insufficient. This leads to the question of whether any supporting information or analysis is required under the framework to substantiate the counter-offer.

While this is unclear, courts reviewing licensing disputes will certainly inquire into the rationale behind the terms of the counter-offer when evaluating whether it is FRAND and whether the implementer’s security is sufficient. For instance, in Saint Lawrence v Vodafone (2016), the Düsseldorf Regional Court examined not only the timeframe in which the implementer responded, but also the geographical scope of the counter-offer and the magnitude of the proposed royalties in looking at the counter-offer and the security obligations of the implementer.

Timeliness of responses

As with several of these factors, the determination of the timeframe in which an implementer must respond to a licensing offer is a fact-dependent inquiry. Factors affecting the determination of what constitutes a reasonable amount of time to respond include the level of detail and quality of information contained in the offer, as well as the number of SEPs asserted. According to the Commission, the more detailed a SEP holder’s initial offer is, the shorter the reasonable time for an implementer to respond to that offer.

Case law has provided some guidance on what does not constitute a diligent or timely response under Huawei. In NTT DoCoMo v HTC (2016), the Mannheim Regional Court found that a counter-offer submitted 18 months after receiving the SEP owner’s offer and six months after the initiation of the suit was not timely.

In Saint Lawrence v Vodafone (2016), the Düsseldorf Regional Court held the implementer of the standard failed to meet its Huawei obligations because it took over five months to respond and request proof of alleged infringement. While the courts have discussed what may be appropriate timing in certain matters, they did not address the level of detail or the quality of the information in those same matters.

While the Commission’s report focuses on the appropriate timeframe in which to respond to an offer, it does not address the timeframe in which implementers must indicate their willingness to license after being notified of infringement. Case law indicates that the timeliness of a response to an infringement notice under Huawei is governed by similar principles as a response to an offer: the more detail a notification contains, the smaller the implementer’s response window.

Specifically, in Saint Lawrence v Vodafone (2016), the Düsseldorf Regional Court held that an implementer who took five months to respond to a notice of infringement waited too long; in Saint Lawrence v Deutsche Telekom (2015), the Mannheim Regional Court held that the implementer’s delay of over three months to submit a licence request after it became aware of the court action against it did not indicate sufficient willingness to enter an agreement on FRAND terms.

Thus far, it is unclear what level of detail an implementer’s response must contain—namely, whether a prompt response requesting additional information and indicating a general willingness to license any infringed SEPs is sufficient, or if a technical analysis and a counter-analysis must be immediately included in the response. While it seems that the counter and technical analysis would not be required until a SEP holder presents its initial offer, this determination is likely fact-dependent—contingent on the level of detail and quality of information provided in the initial notice.

Security

With regard to providing security, the Commission’s report indicates that the amount of the security should dissuade standard implementers from engaging in hold-out strategies. In the context of existing case law, this suggests the implementers should deposit a security, rather than make a pledge to provide security at a later date. Additionally, the implementer should, where consistent with recognised commercial practices in the field, provide security for a worldwide licence. At least one court has determined that an implementer may need to provide a security if the use of the asserted SEP is terminated.

While the Commission’s report does not address the timing in which it is appropriate to provide a security, case law indicates that implementers should render accounts and present a security upon the refusal of its first counter-offer by the SEP owner.

There has been some practical guidance on what constitutes a belated offer of a security. For instance, the security in Saint Lawrence v Vodafone was submitted several months after counter-offers were rejected and was, therefore, not timely according to the Düsseldorf Regional Court.

Likewise, in Sisvel, the Düsseldorf Regional Court found that providing security more than a month after the first counter-offer had been rejected was not timely. While the courts found failure to comply with Huawei obligations in those cases, they did not elaborate on the appropriate window of time for depositing a security upon refusal of the first counter-offer.

Portfolio licences

The Commission’s report appears to approve of portfolio licensing in instances where such licences are in line with recognised commercial practices in the field. These portfolio licences may extend beyond national territories and may include additional patents beyond those asserted, including patents that are not standard-essential. However, such portfolios should be limited to complementary technologies.

This is consistent with numerous court opinions. For instance, in Saint Lawrence v Vodafone, the Düsseldorf Regional Court found that a licence on worldwide terms was FRAND when worldwide licensing was a recognised commercial practice in the industry and the implementer’s activity was not limited to one country.

Similarly, under those conditions, counter-offers limiting royalties to one country were not FRAND in a March 2016 LG Mannheim decision, Unwired Planet v Huawei (2017), and Saint Lawrence v Vodafone, and securities limited to the territorial jurisdiction of one nation were not sufficient in Saint Lawrence v Vodafone.

Outstanding questions

The Commission’s report was helpful in certain aspects, but questions remain unanswered. Several previously decided cases provide insights to fill some of the gaps.

For instance, the Düsseldorf Higher Regional Court stated in Sisvel that in asserting a dominant undertaking, the burden of proof rests with the implementer. The Düsseldorf Higher Regional Court has also opined on the appropriate methodology for determining when a SEP holder qualifies as dominant undertaking under article 102 TFEU. The court indicated that not all SEP owners occupy a dominant market position, rather, only those SEP owners holding patents without which it would be impossible to make a competitive product.

The court also emphasised that a dominant position is one that prevents effective competition in a market; it also indicated that the assessment of market power should include markets upstream and downstream of the market in which a patent holder is dominant—which includes the market for the end product in IP licensing transactions.

Additionally, according to the Düsseldorf Higher Regional Court, the analysis of whether a SEP holder is a dominant undertaking within the meaning of article 102 TFEU should be conducted on a patent-by-patent basis.

A number of courts also addressed modifications to the Huawei framework when applied to cases that commenced before the Huawei decision was issued. For instance, in Saint Lawrence v Vodafone, the Düsseldorf Higher Regional Court took the position that in these cases, delayed infringement notifications are sufficient as long as they occur after the payment of fees and the filing of the case, but before a statement of the claims is served.

The court stated there was no need to withdraw and then re-file the case to provide a notice in compliance with Huawei, and indicated the notice could come after filing of the lawsuit, payment of court fee, or after the lawsuit has moved forward, as the events are typically separated by only days or a few weeks. Likewise, in Pioneer, the Karlsruhe Higher Regional Court indicated that the requisite notice under the Huawei framework may be given through a statement of claims, or in another form, after the lawsuit was initiated.

Finally, despite the fact that the Huawei notice and offer requirements largely map publicly available patents onto publicly available standards, recent case law has been grappling with the propriety of the use of non-disclosure agreements (NDAs) for protecting confidential information that may have to be disclosed to substantiate offer terms and render the offer sufficiently detailed within the meaning of the Huawei framework.

For instance, in a 2016 decision by the Düsseldorf Higher Regional Court, the court requested the parties to draft and agree to an NDA to facilitate the disclosure of information underlying the licensing terms offered by the SEP owner. In subsequent decisions in 2017 and 2018, the Higher Regional Court of Düsseldorf indicated that an unjustified refusal to enter into an NDA may allow a SEP owner to withhold some of the more detailed information underlying its licensing terms, but only to the extent required to protect its confidentiality interests.

The 2018 case indicated the SEP owner had the burden to: demonstrate why the information was a business secret; provide an account of measures taken to maintain the information’s confidentiality; demonstrate the harm it would suffer if the information was disclosed; and establish the likelihood of such harm occurring.

Conclusion

Based on the Commission’s report as well as the rulings of the higher regional courts in Germany, it is becoming increasingly apparent that the obligations of the parties to a dispute over SEPs are not only bilateral, but most likely sequential. Therefore, parties should ensure compliance with their obligations at each step in the Huawei framework.

"Parties should ensure compliance with their obligations at each step in the Huawei framework."

SEP owners should ensure their offers contain the requisite level of detail, including the royalty calculation methodology and evidence that the methodology is non-discriminatory. However, SEP owners may be able to obtain NDAs from implementers to ensure the information underlying calculation methodologies remains confidential.

Implementers of standards must reply to notices of infringement and offers promptly and be cognisant that the more information a SEP owner provides, the more stringently courts will interpret what constitutes a “diligent” or “timely” response. While implementers may dispute whether the SEP owner’s offer is FRAND and submit a counter-offer, they should do so understanding that where worldwide portfolio licensing is a recognised commercial practice in the field and that implementers have activities in multiple countries, counter-offers would likely need to be for a worldwide licence.

Additionally, implementers should be prepared to provide a security upon the refusal of their first counter-offer and this security will likely need to be calculated based on a worldwide licence of sufficient magnitude.

While the European Commission’s Communication on SEPs has provided some guidance, the application of the Huawei framework remains in a state of flux. There are no bright lines or benchmarks for each of the steps and courts are likely to continue grappling with the issues addressed and those not considered by the Commission in its report.

SEP owners and standards implementers will need to look to the courts for additional developments and guidance in the area of FRAND licensing, and in particular with regard to seeking injunctions in cases involving FRAND-encumbered SEPs.

Christa Brown-Sanford, whose practice includes worldwide patent licencing, is a partner at Baker Botts in Dallas, US, and actively follows EU patent developments. She can be contacted at:  christa.sanford@bakerbotts.com.

Liza Miadzvedskaya, a summer associate at Baker Botts in Dallas, US, assisted in the preparation of the article.